Home loan approval is more than showing a lender you have a deposit and consistent income. Lenders are now closely reviewing your spending habits to ensure you can afford the loan you have applied for.
Do you spend a lot of money on take away food, have a high mobile phone bill or like to do a little (or a lot) of retail therapy? Your spending habits can have a negative impact on your loan application.
What spending do lenders look at?
Your spending habits includes food, mobile phone bill, clothing, entertainment, dining out, utilities, education fees, motor vehicle costs and insurances. Basically, anything you spend money on other than debt.
Henderson Poverty Index vs Household Expenditure Method (HEM)
In the past, many lenders would use the Henderson Poverty Index plus an added allowance, to determine the living expenses of a potential borrower. The index is based on Australian survey data and represents an average expenditure for a family of two adults and two children. Any family whose income is below the Henderson Poverty Index is considered to be living in poverty. By using this index as an average for family expenditure, the borrower’s actual expenditure has not been calculated, and no allowance has been made for whether they spent more than that.
Over the past 2 years, the Australian Securities and Investments Commission (ASIC) has been tightening lending criteria and reviewing the processes that lenders and brokers are using to determine an applicant’s borrowing capacity.
ASIC have now taken this a step further over the past 6 months and are focussing the spot light on living expenses and requiring brokers to do their due diligence to ensure the borrower’s spending habits noted in the loan application are a true and reasonable reflection of what the borrower is in fact spending.
Lenders are starting to request savings account statements to verify that your expenses are accurately reflected in the loan application.
What caused this change?
Interest rates have been low for a while now and ASIC are concerned that people are living too close to the line. If interest rates increase, there is concern that people will not be able to afford to meet their minimum repayments.
To mitigate this, ASIC are requiring that all home loan applications meet certain criteria, which includes closely reviewing living expenses.
Planning on taking out a home loan? Our Tip
Plan ahead and stick to your budget
If you’re planning on taking out a home, it is vital that you review your spending habits, set a budget and stick to it. You may already have your savings, but if your spending pattern means you’re regularly dipping in to your savings, or failing to pay your bills on time, you could run into difficulty when applying for a home loan. It’s important to show the lender that you can manage your spending and stick to a budget that allows you to meet your mortgage repayments.
If you or someone you know is planning to take out a home loan in the near future, get in touch for a complimentary consultation and we can review your current spending habits and advise you on the steps to take to ensure you’re on the right path for a smooth home loan approval.